how much super do i need to buy an investment property?

How much super do I need to buy an investment property?

Buying an investment property through your superannuation requires a Self Managed Superannuation Fund (SMSF). We must first know a few basic facts about this self managed retirement savings investment:

• you should aim to have at least $150k in the super fund

• you can have up to 6 members in the SMSF

• you or a family member (related party) can’t live in the property

• you can’t transfer a residential property you already own into your super fund

• your super fund can borrow money to purchase a property

• there will be responsibilities that you legally have as a director of your own super fund

• a self managed super fund isn’t the answer to all of your problems

This is an area of personal finance we strongly recommend seeking financial advice for, as the details can be complex. Read on for more information, and please reach out to our team to connect you with the professionals you need for your situation.

How much super do I need to buy an investment property?

If you wanted to buy a property with your SMSF, you could just buy it outright if you had the money in the fund. Otherwise the SMSF would have to get a loan and that’s what’s known as limited recourse borrowing.

It’s not like buying a home or investment property in your own name. Another reason why you may need a larger account balance for your SMSF is because you will need a deposit of 20% to get a loan in the name of your SMSF. Further to this, a lender will want minimum liquidity in the loan amount of 10% in cash.

How much money do you need in your super to buy an investment property? Let’s look at the numbers:

• $600,000 property price with a $480,000 loan (80%)
  $120,000 deposit is required (20%)
  $48,000 liquidity is required in the bank account.

So just on that basic number, you would want to have $168,000 in the SMSF to purchase a $600,000 property.

I have not even included any stamp duty or associated closing costs.

As part of this lending requirement, the lender will take into account any rental return and any superannuation guarantee payment which is made to your account (that’s your 10.5% ‘super’).

You need to factor in any property expenses, time without tenants, agency fees, insurance costs etc.

If you have the cash, you can certainly buy a property outright. If you need a loan with your SMSF, it’s called a Limited Recourse Borrowing Arrangement (LRBA). There are some complexities and things you need to know about LRBA’s, such as they can’t be interest only or can’t be tweaked once in place. A professional will detail the current legislation surrounding LRBA’s as they have been known the change over time.

A basic rule about SMSF’s

As a former financial adviser, Glen James generally told his clients that you would only set up a SMSF if you fit into at least one of the below categories:

• you have a burning desire to buy a property with your superannuation assets (you would still generally need around that $200k anyway)

• you have a complex estate planning issue and a little bit more control is required (i.e. a large blended family with ex-partners and step kids)

• you have significant wealth in your superannuation (and therefore control may be a primary driver)

If you have a super balance of say $100,000 with one of the main super funds, there is not really an advantage of setting up a SMSF. Most of the investments apart from property you would have in a SMSF (like shares or managed funds), you can get in a retail fund without the added expense and hassle of being a director. Again, if you wanted “property” with your super there are options to invest just in property, just not a direct investment property, with your current super fund.

A common trap

This is an issue Glen has seen a lot - people will go and set up their own SMSF and rollover the funds from their existing funds and in one fell swoop their life and income insurances are cancelled. You may not even know you have insurance in your current fund. In any case, you would need to seek advice to set up new insurances which are owned by the new SMSF before you cancel your existing accounts. You will need a financial adviser for this, as most of the life and income insurances you buy direct, like over the phone or internet (other than being rubbish) would not be able to be owned by your SMSF.

Advice

This is one area of your personal finances where we would strongly recommend getting financial advice. Well, in fact if you are doing some lending with the use of a LRBA, the bank may wish to see your financial advice, so a Statement of Advice (SoA) would be required regardless. Please speak to a qualified financial adviser or accountant who work in this space. Reach out to our team and we can get you in touch with an adviser from our trusted panel.

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